By Peter Tan
President, Malaysian Air-Conditioning & Refrigeration Association (MACRA) Chairman, Malaysia Council of M & E Associations
Malaysia’s construction industry plays a critical role in national development, delivering infrastructure, commercial buildings, and housing that support economic growth. Yet behind this progress lies a long-standing structural weakness that continues to punish the most vulnerable players in the industry: unprotected retention sums.
Retention sums—typically 5% to 10% of a contract’s value—are withheld by employers or main contractors as security against defects or incomplete works. In theory, this practice protects project owners. In reality, it has become a major source of financial risk for subcontractors, especially when projects are derailed by insolvency.
For subcontractors, retention money is not excess profit. It is earned income, often equivalent to several months of operating cash flow. Workers’ wages, materials, statutory contributions, and financing costs must still be paid upfront. When retention sums are delayed—or worse, lost entirely—subcontractors face immediate financial distress.
This vulnerability was starkly exposed by a 2019 Federal Court decision in SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd (in liquidation). The Court ruled that retention sums are not automatically held on trust unless the construction contract expressly states so. Without clear trust or segregation clauses, retention monies form part of the employer’s general assets when the company goes into liquidation.
The implication is severe. Subcontractors, even after completing and certifying their work, are treated as unsecured creditors in insolvency proceedings—ranking among the last to be paid, if they are paid at all. This ruling dismantled the long-held assumption that retention sums were inherently protected and exposed a critical gap in Malaysia’s construction payment framework.
The consequences are already visible across the industry. Small and medium enterprises (SMEs), which make up an estimated 70% of Malaysia’s construction sector, bear the brunt of these losses. When retention monies disappear during liquidation, subcontractors experience cash flow paralysis, business failures, and job losses. Projects stall, skilled workers leave the industry, and overall workmanship quality suffers.
Retention sums are the lifeblood of subcontractors. When these funds are unprotected, it is not just payments that are lost—it is confidence in the entire construction system.
The current arrangement effectively pushes insolvency risk down the supply chain, from developers and main contractors to subcontractors who are least able to absorb financial shocks. This imbalance contradicts national goals to strengthen SMEs, improve productivity, and enhance construction quality. It also exposes a limitation in the Construction Industry Payment and Adjudication Act 2012 (CIPAA), which addresses delayed payments but does not protect retention sums when insolvency occurs.
Malaysia’s approach stands in contrast to practices in other developed construction markets. In the United Kingdom, reforms increasingly promote or require retention monies to be placed in ring-fenced or trust-based schemes, ensuring they remain protected even if a party becomes insolvent. Singapore has similarly adopted stronger contractual and regulatory safeguards, recognising that money deducted from subcontractors should not be used to pay unrelated debts.
This issue extends beyond subcontractors alone. Developers face higher project risks when financially weakened subcontractors struggle to perform. Main contractors encounter disrupted supply chains. Government aspirations for sustainable, high- quality construction delivery are undermined. Ultimately, when subcontractors fail, projects fail—and the economic consequences are felt nationwide.
Malaysia can no longer afford to treat retention protection as optional. Practical reforms—such as mandatory trust or segregated retention accounts, clearer statutory recognition of retention sums, and improvements to standard contract forms—would go a long way toward restoring balance and confidence in the industry. Subcontractors are the backbone of Malaysia’s construction sector. Protecting their earned funds is not merely a contractual issue; it is a matter of industry sustainability and economic resilience. The question is no longer whether reform is needed, but how much longer the industry can afford to wait.